Millions trapped in debt spiral

2012-07-20 14:14

Cape Town - Of the 19.5 million credit active consumers in South Africa, 12 million have missed at least one debt instalment, according to an industry expert.

Even more concerning, 9 million - or 46.4% - have impaired credit records as a result of missing three or more instalments, says Clark Gardner, founder and CEO at Summit Financial Partners.

The biggest culprit when consumers fall into the debt trap is their use of debt to service other debt. Former Reserve Bank governor Tito Mboweni warned as far back as six years ago about the "credit madness", where consumers were offered up to three credit cards from banks and told "they could use the one to pay off the other".

Gardner says about 55% of credit active consumers in South Africa spend more than they earn.

"Consumers typically fall into a debt spiral when they access increasingly more debt merely to make ends meet and pay other existing debt. This is what we call 'borrowing from Peter to pay Paul', and results in the average consumer accumulating up to 11 accounts.

"How consumers react the first time they cannot afford a debt instalment is critical," says Gardner. He shares his top three tips to avoid the debt trap:

1. Spend less than you earn

Any financial planning advice should always start with looking at how you spend your money and whether you have a cash surplus or a cash shortage at the end of the month.

Understanding your spending habits by measuring your spend over a number of months is the first, and most effective, financial habit any consumer should adopt.

• Measure your spend

If you are not measuring, then you are not aware if you are spending less or more than you earn. Understanding whether you are spending on necessities or luxuries is critical for effectively managing your cash flow.

This will also provide an early indicator of bigger problems like excessive life style costs that may need immediate, corrective action.

Seeing your spending patterns in black and white will improve your discipline and prevent impulse purchases by illustrating the consequences of not sticking to your budget.

When you understand that buying those shoes will mean you don't have enough money for the month's groceries, you will be more likely to think twice.

• Set household financial goals

If everyone in your household understands the end goal, they will know why they need to stay disciplined and make sacrifices. Goals provide a sense of financial purpose which will improve discipline and ensure buy-in from all household members.

• Change your consumer norms

Most consumers buy their vehicles on credit and like to buy brand new models that will impress their friends and colleagues.

What they fail to realise is that when you buy a new vehicle, you lose at least 15% of its value on day one, not to mention that you will be paying over 10% for finance costs in the first year alone.

How impressive is a fancy vehicle when you realise you have lost 25% of its value in the first 12 months - and it is still owned by the bank?

"Our interventions are aimed at challenging the current thinking in society, making it more 'cool' to resist your ego and spend less than you earn," says Gardner.

2. Correct your past mistakes

Where you have a negative monthly cash flow, it is usually due to excessive debt instalments. Make sure you address this affordability problem early and effectively.

Accessing more loans to try and cover the shortfall will merely delay the crash and multiply the problem.

If you are struggling to pay your debt instalments, you can contact your credit providers and make payment arrangements, like paying reduced instalments for three to four months.

This will allow you to catch your breath. Trying to hide the problem by making more debt will inevitably lead to a dead end (usually after about 10 accounts) which will require far more drastic action like debt counselling, which can take up to five years to bring you back to financial health.

The sooner you address your negative cash flow, the quicker and easier it will be to correct. Do not ignore letters of demand or default notices, as they will not go away and you will merely accumulate expensive legal and collection fees.

3. Have an emergency savings fund

Emergencies are inevitable. To prevent them from wreaking havoc on your finances, build up a savings fund which you can use to pay for emergencies when they happen.

You should aim to have savings equal to two or three times your monthly salary, but start by saving something every month.

Having an emergency savings fund will save you from having to access expensive unsecured debt when urgent, unexpected payments need to be made.

When debt is accessed out of desperation, we usually don't take the time to understand the costs, risks or consequences, resulting in debt that can easily get out of control.

 - Fin24

  • thando.gqabaza - 2012-07-20 14:29

    South Africans just want the most expensive car / watch / whatever and the only reason for it is to impress their friends. A shame really.

  • faizieishlah.shabalala - 2012-07-20 15:15

    Ok, so how do these people still get more and more credit finance. The system of credit rating is bogus

  • mthulisi.msimanga - 2012-07-20 15:21

    Gvt created the "begging bowl syndrome" now SOME people believe they can get away with not paying back loans from the banks. My people, a bank loan is not a grant.

  • yolande.rwaai - 2012-07-20 15:23

    In the words of Will Smith \Too many people are spending money they didn't earn, to buy things they don't need, to impress people they don't like\.

      raymond.abrahamse - 2012-07-20 19:55

      Absolutely true.Their greeds are more than their needs.

  • asibili - 2012-07-20 15:30

    Bad news is never always bad news its sweet news to others it just depends on which side of the fence you are :)

  • jpstrauss - 2012-07-20 15:32

    When prices are higher than in the first world and salaries are not, it makes it difficult.

  • bernpm - 2012-07-20 15:50

    As long as shops can still offer "account cards" and banks can still offer "credit cards", this problem will never go away with the poorer of society being the most likely victims.

      gavin.hillyard - 2012-07-26 18:22

      The banks are the biggest culprits in this sorry state of affairs. They knowingly give credit to those they KNOW will not be able to pay back. Now the biggest growth area for the banks is UNSECURED debt. History repeating itself? This will be a disaster in the not too distant future - watch this space. Their greed is legion some might say that their ethics are questionable.

  • steve.atherton.180 - 2012-07-20 15:58

    Are we saying that our people are stupid ?

      mike.bundy.73 - 2012-07-20 17:32

      I don't think so. I think that we are less well educated on how to manage our money affairs properly. We are persuaded by misleading ads that promise "easy payments" and "cash back" and "no money down" and "free" stuff. We are encouraged, pressured even, to buy impulsively without thinking carefully. Not stupid, but we are perhaps ignorant.

      MallyGold - 2012-07-20 18:01

      No Mike, that's stupid!

      brian.exmachina - 2012-07-20 19:02

      I think it's very easy to judge if you're not the one with the problem. A debt that is easily serviceable can become a nightmare very quickly if you lose your job due to recession, for example. Suddenly you have to dip into your savings while looking for a new job and might eventually have to settle for less money than you originally earned. Combine that with the astronomic rise in fuel, food and electricity prices and it's a recipe for disaster. Don't forget that some companies dismissed thousands of employees. I know financially savvy people who are now struggling to pay their debts because this kind of thing happened to them. If you go from a R30k salary to a R20k one, wipe out R80k of savings and run up a credit card while finding a job, and now you have to service a car, mortgage and credit card account on the lower salary it doesn't get pretty.

      lacrimose.wolf - 2012-07-20 19:31

      @BrianExmachina - and when, if you're me, you get retrenched 5 times in 7 years, you're truly up a creek. Each of my retrenchments incidentally was by well-established multi-nationals, re-locating their operations to Eastern Europe, Asia or Brazil. All these co's found the the mad laws and govt foot-dragging too much to handle. All the advice given in this article is good but as they say man plans, the gods laugh.

  • glenda.mackay.18 - 2012-07-20 16:31

    Why are people trapped in a debt spiral? Well lets just consider basic needs, electricity has spiral up, rates and taxes have spiraled, petrol has spiraled. The goverment spends more and more on itself and taps as much as it can from its people!!!!!!

  • Tshepo Mongale - 2012-07-20 16:38

    people are very reckless with their money. credit providers are ruthlessly pushing people into deep debts.

  • freddy.vanwijk - 2012-07-20 17:03

    It's because people do not manage their money properly. Other factors include cost increases beyond personal control and family feuds. When for example an insurance policy becomes unaffordable then cancel it. One golden rule on this is that if it is a retirement annuity, don't cancel that. It's the "keeping up with the Joneses Syndrome" that many people are suffering from including family feuds.

      Daan - 2012-07-20 18:29

      It is called "financial discipline" Never spend more than 90% of what you earn. First save the 10%, thereafter balance your budget, and stay with it. You have to create your own "financial freedom". Financial freedom can NEVER be demanded, will NEVER be handed out as grants, and can NEVER be "redistributed". Blame the government for spreading the expectation.

      Klaus - 2012-07-21 14:18

      @tommo, charity begins with No 1, at home

  • zip.reeper - 2012-07-20 21:22

    no issue. if you need bucks the government will print you some.

  • jacques.shepperson - 2012-07-20 23:15

    The rand is so weak that we all have to overpay goods. Everything is based on the US$ even if it is made in SA. Many time people are pressed to make dept. Bank loans for cars is upto 60 months, and the warranty only 36-48 and capped at 100 000-120 000km. What happens if you have a failure after that?

  • Thobile Lugwadu - 2012-07-21 08:10

    I owe four comercial banks over R180000 in credit cards and repossesed bakkie. There is no way that they can recover this money since i am sitting at my shack doing nothing. I own absolutely nothing except a pot,spoons and a chair. I offered to work for them for free until the dept is payed in full. I only asked for taxifare and a lunchbox and they just laughed at me. Hope they take me to court, and since there is nothing to attach, i will berg the magistrate for a jail time so that i will get free meals ant training.

  • winifred.watson.9 - 2012-07-21 09:47

    The main problem is that evil CREDIT CARD. It should be law that your Credit has to be review on an annual basis. If you still owe money, and your history is bad, that card should be withdrawn until they pay up their debt. Only one credit card should be permitted so there debt is not spread over into all the banks. People to day are living above their means, life is hard I accept that, but you have to cut your cloth to your means. Expensive cars, designer clothes and jewellery etc is a no no. Stop trying to live like Posh and Becks. I see Government is also to blame for this, they are continually flaunting their enrichment in our faces, expensive cars, houses, clothes etc and not to mention the extravagant weddings and parties that we see daily. Maybe is they toned down about people maybe less inclined to live like a politician and it be an example for the youth to realize they have to work for what they want, things dont come easy. Poor Pensioners have had their lively hood taken away from them because people cant control their spending, so they are suffering now.

      gavin.hillyard - 2012-07-26 18:28

      The banks LOVE debt - they make a fortune in interest on credit cards while encouraging cardholders to pay the minimum amount - this just extends the payment period - they love it

  • laurie.youngleson - 2012-07-21 11:33

    Forgive my (obvious)ignorance, but if we only have 10.3 million taxpayers, how can there be 19.5 million with credit? (problems)!!!!

  • andrew.gibbs.1420 - 2012-07-21 19:22

    What an excellent article. Well done to whoever wrote this. The steps mentioned are the foundation for good decision for decades.

  • nicole.vandervelde.96 - 2012-07-22 09:06

    I say write it all off at the credit bureau and start afresh. Doesn't make sense I know.

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